AFM NED Conference Solvency II Business as Usual. Steve Dixon of SDA llp

Transcription

1 AFM NED Conference Solvency II Business as Usual Steve Dixon of SDA llp

2 What am I going to talk about Solvency II What are the key components and how do they fit together Risk, capital, pricing, management actions Investment Impact of Solvency II on investment for smaller mutuals Corporate governance Products Product reviews Profitability as part of Solvency II Risk & Capital Risk measurement tied to Capital ORSA showing future business plan and capital + Risk Reporting

3 Key components of Solvency II Technical provisions Solvency Capital Requirement Risk management Board control and governance Reporting to the public

4 Technical provisions are. Market consistent Best estimates Allow for the cost of capital Allow for future discretionary benefits Allow for future management actions

5 Solvency Capital Requirement. Value at risk at 0.5% probability level over 1 year Linked to BBB level of default Similar model to rating agencies Expected sometimes to break Lower target of MCR needs to be protected against failing

6 Investigations into experience Mortality Morbidity Lapse Surrenders Expense

7 Investment strategy and solvency for withprofits offices Liabilities and assets under Solvency II are on a realistic basis Liabilities allow for investment scenario in the risk free rate in the future and the current value of assets now Bonuses and surrender values should allow for this scenario Management actions and the PPFM really affect this

8 Valuation of Liabilities MCEV technique Day 1 value is embedded value on sale of product Value of liabilities should be basis for sale value Terminal bonus, MVRs and guarantees all directly valued Underlying guarantees valued on risk free rate basis Expected future bonus on the Solvency II scenario directly valued Manage according to the Solvency II balance sheet Addition to own funds means making an embedded value profit Capitalises all changes in assumptions immediately Care needed on profit and loss calculation to identify impact changes in software, method, basis from actual management actions Liability stresses for Insurance Risks can feed directly into risk register

9 Management actions Liability values are very sensitive to management actions assumptions 1. Cost of capital risk margin allows directly for what board could do 2. Movement in liability values for changes in terminal bonus, MVR and speed in moving reversionary bonus Risk free rate basis for guarantees means that, if matched, guarantees are covered.

10 Example firm 1 With-profits firm that normally only determines bonus annually Unlikely to reduce surrender values for small movements in share values (only if near full Solvency II stress occurs) Unlikely to reduce terminal bonuses in short term Market falls by 15% on equities and gilt yields drop to 1.75% Result stress has to be absorbed by own funds Therefore, trigger points or derivative programme in place to protect fully against movement in assets Likely either very conservative investment strategy or very high free assets Is this in accordance with literature, treating customers fairly, PPFM

11 Example firm 2 Very active approach to interim bonuses changed within a year based on expected investment return Active MVR policy, return shared between terminal and reversionary with terminals being mirror image of MVR Surrender values on conventional with-profits changed rapidly Market falls by 15% on equities and gilt yields drop to 1.75% Result stress initially absorbed by changing liability value to allow for lower bonuses, lower terminals and applying MVRs Therefore, triggers and derivatives at lower levels purely to protect guarantee position Higher equity exposure for same free assets Is this in accordance with literature, treating customers fairly, PPFM

12 Corporate governance of investment Investment goals of insurer Control through Investment Committee Prudent Person Principle Fund managers actions Capital required and measurement of risk Investment mandate

13 Issues Education of board NED skill set Need for investment consultant or can this be done by specialist NED Information from fund manager Look through not just an annoyance for Solvency II Need to understand / challenge Frequency and quality of investment committee meetings

14 Product reviews Fit for purpose Customer needs Other products Profitability MCEV Impact day 1 tech provisions Too profitable? Literature Explain risk properly Explain needs being met properly..

15 Issues Rolling cycle of product reviews Actuarial part could be driven from day 1 technical provisions Experience investigations tie in Stage: Initial review to see if need for more in depth review and whether revamp or completely new product type In depth may require customer testing focus groups In depth much more expensive than initial review

16 Risk measurement Risk appetite Review at board level acceptance or need to mitigate Risk identification Review impact on business plan - FLAOR Measurement SCR capital or other

17 Risk measurement SCR at extreme level Mitigators at different levels BAU levels Management actions 10% level of risk for market movements Appetite for risk at different levels

18 Issues Education of board NED skill set Need for risk manager and NED specialist on risk? Control properly exercised through risk committees Better MI and better discussion required Need to split audit from risk?

19 ORSA Risk management, risk appetite and controls FLAOR previously FCR Reverse stress tests Risks that cannot be measured?

20 Public disclosure the SFCR Business and Performance Systems of Governance Risk profile Valuation Capital Management

21 Risk Profile Risks split qualitative and quantitative Risk exposure including off balance sheet and spvs. How the risks have changed, how assets are invested Material risk concentrations Expected profit in future premiums Risk sensitivity measurement and how

22 Systems of Governance Structure of Board and committees Remuneration policies and practices Fit and proper policy skills expertise etc for functions Risk management system strategies, processes and reporting Information on the ORSA Internal control systems (IA) How Actuarial function is organised

23 Business and performance Structure of organisation Underwriting performance aggregate and material line of business Performance of Investments Expense Information Anything else that has material impact

24 Capital Management Amounts of own funds by tier of capital including analysis of change Policies and processes for managing own funds and timescale of business planning period SCR / MCR coverage plus transitionals SCR split by risk module and simplifications and internal model split by classification of risk Use of internal model and any integration for partial internal model differences standard formula and internal model Any non compliance with MCR and significant noncompliance with SCR over the period origin and consequences

25 Valuation Separately, material classes Value of assets, bases, methods, main assumptions Value of technical provisions, bases, methods, main assumptions Other liabilities bases, methods, main assumptions For all, need uncertainties, differences on line by line basis with accounts Information on volatility, matching, transitional risk free, transitionals

26 Solvency II links up Valuation Governance Capital Product profitability Risk

27 AFM NED Conference 10 May 2016, hosted by: